Private hospitals in Malaysia operate on 10-15% profit margins

Private hospitals in Malaysia are operating with “razor-thin” profit margins of just 10 to 15 per cent, according to the latest data from the Association of Private Hospitals Malaysia (APHM).

The APHM Factbook 2024 titled “Evolving Landscape of the Private Healthcare System: Contributions, Challenges, and Recommendations” – which was released last November 13 – suggests that while the sector is often seen as lucrative due to the steady demand for health care services, it remains highly vulnerable to medical inflation.

This is because private hospitals operate on a self-financing model, unlike public hospitals that benefit from government subsidies.

“Unlike public hospitals, private hospitals are self-funded and do not receive fiscal support from the government. As these expenses rise, they will inevitably be partially passed on to patients in the form of higher treatment costs to ensure business sustainability,” said the APHM Factbook 2024.

While the average inpatient bill rose by about 4 per cent annually between 2020 and 2023, the report pointed out that this increase is modest compared to the actual surge in health care costs, which have risen by around 12 per cent annually due to medical inflation.

The report also noted that private hospitals’ average profit before taxes stands at just 38 per cent, after factoring in subsidies that cover up to 62 per cent of total profit. These include room and board charges (6 per cent subsidy), nursing charges (32 per cent subsidy), and other expenses like depreciation (25 per cent subsidy).

Pharmaceuticals make up the largest portion of private hospitals’ profits at 48 per cent, followed by radiology (10 per cent), medical and surgical supplies (10 per cent), and operating theatre costs (6 per cent). Other categories, including laboratory and facility charges, contribute smaller shares, with rehab and physiotherapy accounting for less than one per cent.

APHM added that maintaining a self-financing business model for private hospitals in Malaysia is a challenging task. With lean profit margins, much of the revenue is typically reinvested into the business to upgrade facilities, invest in new technologies, and recruit medical talent to support growth.

Mitigating medical inflation
Despite rising costs, private hospitals have maintained lean profit margins by investing in efforts to optimise processes and services, such as adopting new technologies and implementing cost-containment measures, including subsidies. These initiatives have reduced the impact of medical inflation on patients by about 22 per cent, APHM said.

Cost-containment remains an ongoing effort to curb the sharp rise in health care costs. One example of cost-containment is procurement excellence.

Many private hospitals in Malaysia are part of larger health care groups, such as Prince Court Medical Centre, Gleneagles Hospitals, and Pantai Hospitals under IHH Healthcare, which centralise the procurement of medical supplies, drugs, and equipment.

This shift towards collective purchasing allows hospitals to leverage bulk buying power, negotiate better prices with suppliers, and pass on savings to patients in the form of lower health care charges.

“In the past, these purchases were done by individual hospitals or through the centralised procurement system. Today, the private hospital sector is moving towards central procurement. This involves the collective purchasing of medical supplies, drugs, and equipment by a group of hospitals or health care networks instead of purchasing at each individual hospital.

“By consolidating their orders, private hospitals can leverage higher volumes to negotiate better prices with suppliers. This bulk purchasing power enables private hospitals to drive down costs, which can then be passed on to the patients in the form of lower health care charges,” stated the APHM Factbook 2024.

Another aspect of procurement excellence is negotiating long-term contracts with pharmaceutical companies, suppliers, and medical device manufacturers to ensure competitive pricing stability.

In terms of prudent medical practices, private hospitals are also focusing on resource optimisation. This includes using evidence-based medicine to adopt cost-effective treatment options, reducing medical wastage, and minimising unnecessary procedures.

According to the APHM Factbook 2024, private hospitals are increasingly turning to generics and non-inferior biosimilars, which offer similar efficacy at a significantly lower cost.

“Seeking cost-effective treatment options is another aspect of prudent medical practices. Examples include a shift towards generics or non-inferior biosimilars adoption where appropriate, which can significantly lower the cost of treatment at similar drug efficacy,” the report noted.

There is also a growing trend towards replacing disposable, single-use equipment with reusable, sterilised alternatives to reduce medical waste.

The report cited a case study in which a large hospital group in Malaysia implemented a Price Assurance Programme to standardise treatment costs and ensure transparency.

The program collects data on patient and doctor billings to reduce price discrepancies for procedures such as colonoscopy, total knee replacement (TKR), anterior cruciate ligament (ACL) reconstruction, and hysterectomy. These procedures are standardised into treatment packages, offering patients clear, predictable costs while maintaining care quality.

Currently in its six-month pilot, the programme has reduced colonoscopy bills by 3 to 5 per cent, saving patients at least RM2,500. With 120 to 150 patients monthly, the impact will grow significantly over time. The programme took four years to develop, including data collection and securing support from doctors.

Cross-subsidisation is another best financial practice in the private hospital sector, where revenue from certain services is used to fund less profitable but operationally critical services. This practice is seen as a key mechanism allowing hospitals to finance essential yet unprofitable services.

Notable examples of cross-subsidised services include the intra-aortic balloon pump and the emergency department (A&E), which often operates at a financial loss compared to other departments. Private hospitals typically use profits from more profitable services to cover these losses without burdening patients with the additional cost.

The report noted that cross-subsidisation beyond A&E is crucial in enabling hospitals to stay operational while maintaining high-quality care. Any actions affecting profit components – such as profits from pharmacy or medical technology – can quickly turn razor-thin profit margins (10 to 15 per cent) into losses, making the practice vital for financial stability.

APHM said the effectiveness of private hospitals’ cost-containment strategies is evident when benchmarking Malaysia’s health care costs against neighbouring countries.

“Malaysia remains competitively ranked at a rate of 5.3 per cent compound annual growth rate (CAGR) for out-of-pocket health care costs versus Singapore, South Korea, and Japan, despite experiencing escalating health care costs between 2015 and 2020.

“Moving forward, these strategies will be crucial in ensuring that private hospitals can continue to provide high-quality care while maintaining financial sustainability,” APHM said. CodeBlue